Wednesday, November 22, 2017

REPOSTS: The real meaning of Thanksgiving

What they don't tell you about Thanksgiving in school

Peter Klein gives us a more complete story of the first Thanksgiving:
Faced with potential starvation in the spring of 1623, the colony decided to implement a new economic system. Every family was assigned a private parcel of land. They could then keep all they grew for themselves, but now they alone were responsible for feeding themselves. While not a complete private property system, the move away from communal ownership had dramatic results.

This year I am giving thanks for private property.

How did property rights save China, the Pilgrims, and Vietnam?

Good short video on the incentive aligning effects of private property at our friends at MarginalRevolution University

Monday, November 20, 2017

What are economists good and bad at?

Succinct summary from Claudia Sahm:
Being good at counterfactual thinking, trade offs, comparative advantage, and other non-intuitive logic, as well as a love of numbers, are useful attributes of economists BUT only as part of a larger team. For example, we, economists, tend to have blind spots from our assumptions on efficiency, credibility, rationality, markets, etc., in a way that a non-economist would not. And yet, economist are known for going it alone. Sigh.
Her take-away: Economists work best as part of a team with diverse viewpoints.
Groupthink … the lack of meaningful diversity … in economics has real consequences for real people. We give advice to Congress on how to spend hundreds of billions of dollars in stimulus. We make decisions at the Fed on interest rates. And in many capacities, we have input on financial markets, regulation, and business practices. This adds up to profound effects on many, many lives. And yet, our closed-system culture puts great emphasis on top five publications (an internal status marker) and the credibility of our economic institutions (making sure economists remain key to policy).
Excuse the dangling preposition in the title.

Saturday, November 18, 2017

REPOST: FCC Chairman uses management theory to improve agency decision-making

Monday, April 10, 2017


FCC Chairman uses management theory to improve agency decision-making

FCC Chairman Ajit Pai wants to increase the quality of economic analysis done by the FCC staff:

...he explained that economic analysis, primarily in the form of cost-benefit analysis, is largely ignored. Actually, it is probably worse than that: Those types of analyses aren’t even done. For example, significant areas of the agency’s work in recent years ... contained nothing that would pass as economic analysis.

So how to do this?  Chairman Pai wants to change the organizational structure from an M-form (with economists mixed in with attorneys) to a functional organization, with economists in their own division.

Some middling economists had suggested exactly this in an article titled "The Economics of Organizing Economists."

... a functional organization has a couple of advantages over a divisional form. First, a functional organization is more likely to keep up with new methodologies and so be able to apply them to enforcement questions. Second, since the staff economists and attorneys produce information, not traditional goods or services, there is an advantage to the independent analyses done by attorneys and economists. Without two separate memos, the decentralization of decision making in a divisional organization is likely to result in less information reaching the ultimate decision makers.

Friday, November 17, 2017

What happens if Uber raises driver wages?

ANSWER:  Nothing, because driver supply increases which reduces the time spent driving for each driver.
We find that when Uber raises the base fare in a city, ... there is no detectable difference in the average hourly earnings rate compared to before the fare increase. With a higher fare, drivers earn more when driving passengers, and so how do drivers make the same amount per hour? The main reason is that driver utilization falls; drivers spend a smaller fraction of their working hours on trips with paying passengers when fares are higher.
HT: MarginalRevolution.com

Restaurant Strategy

Must read for anyone who ever thought of opening a restaurant:
When might a restaurant be deemed to have moat? The test is always quantitative: does the restaurant generate a return on investment that is significantly above the opportunity cost of capital and does that last for a significant number of years? ...  For example, chain restaurants can create distribution networks and systems that take advantage of supply side economies of scale. Their moat is similar to a business like Costco in that way. Other factors can create moats and sometime it is the combination of factors that produces the barrier to entry. Sometimes a famous chef’s brand acquired from television appearances can help create a moat. Sometimes a location can be helpful as can longevity (the comfort food effect) and historical significance.
HT:  MarginalRevolution.com

Tuesday, November 14, 2017

John Oliver on Economic Development

One of my favorite examples of a prisoner's dilemma is when states compete to lure companies to relocate, each state offering greater and greater development packages and tax breaks. Offering such tax breaks is a dominant strategyif other states don't offer tax breaks, you will certainly win if you do; if other states offer tax breaks, the only way to stay in the running is to offer them as well.

Earlier this year, Wisconsin offered $3 billion to lure a Foxconn factory to its state. New Jersey is offering up to $7 billion to lure Amazon to open a new headquarters. The problem is that such offers lead to an arms race in which the tax breaks actually become irrelevant. When every state offers huge tax incentives, companies decide on non-tax factors like an area's labor force, transportation, and quality of life. But that's exactly how companies would decide in the absence of state tax incentives. Thus, the incentives don't change what companies ultimately do, but they sure cost a lot.

As John Oliver observes, that's why some of the states that aggressively offer tax breaks, like Connecticut, see only a return of seven cents on every dollar given away.

Saturday, November 4, 2017

REPOST: Fee-for-service vs. capitation: 10 fewer amputations per 1000

Fee-for-service vs. capitation: 10 fewer amputations per capita

It is difficult to align the incentives of physicians (making money) with the goals of patients (low cost, high quality care) due to asymmetric information:  only the physician knows what the patient wants.

What distinguishes Medicare Advantage plans from traditional fee-for-service plans is the degree to which they use mechanisms designed to encourage the delivery of cost-effective quality care. Three critical mechanisms are financial incentives that are aligned with clinical best practices, a selective network of providers, and more active care management that emphasizes prevention to minimize expensive acute care.

Here is what happens:
  • Single-year mortality rates fell from 6.8 percent in the traditional fee-for-service sample to 1.8 percent 
  • Patients in the Medicare Advantage plans had shorter average stays in the hospital (about 19 percent shorter.)
  • Patients in the managed plans were more likely to receive preventive care ...For example, diabetic patients in the fee-for-service sample had an average of 11.5 amputations per 1,000 patients; those in HMO plans with global capitation had only 0.3. 
BOTTOM LINE:  Incentives matter
 “We've found that U.S. private insurers have created an operating model that can deliver better care at a lower cost and have a major role to play in the ongoing national efforts to improve health care quality,” said Stefan Larsson, a BCG senior partner and coauthor of the report. “Quite simply, we’ve found that the more aligned the care, the better the quality delivered.”

Thursday, November 2, 2017

Subsidizing the American Dream

The Republican tax plan includes a provision that reduces the mortgage interest deduction. The deduction effectively subsidizes home ownership, but not other living options such as renting.

What is the effect of subsidizing the "American dream" to own a home? At least some data comes from an analysis of the experience in Denmark:
First, the mortgage deduction has a precisely estimated zero effect on homeownership. This holds even in the very long run. Second, the mortgage deduction has a sizeable impact on housing demand at the intensive margin, inducing homeowners to buy larger and more expensive houses. Third, the largest effect of the mortgage deduction is on household financial decisions, inducing them to increase indebtedness.

This continues the theme from the previous post that finds college tuition subsidies likewise don't increase the "desired" activity, but do significantly distort the market.

Wednesday, November 1, 2017

Why are you paying so much in tuition?

USA Today warns us that "College tuition is rising faster than inflation" but that headline downplays the size of the increase. Over the last fifteen years, college tuition has outpaced not only inflation but growth in housing cost and even the cost of healthcare. A number of recent economic papers have seemingly converged on the main cause: government subsidies.

Stephanie Cellini and Claudia Goldin examine for-profit schools and compare tuition at those with and without students eligible for federal financial aid. Aid-eligible colleges charge, on average, 78% higher tuition than non-aid-eligible colleges, and the differences in some cases are "roughly equal to average student grant awards and our estimate of the loan subsidy."

Another study confirms that this is not isolated to for-profit colleges:
We find that each additional Pell Grant dollar to an institution leads to a roughly 55 cent increase in sticker price tuition. For subsidized loans, we find a somewhat larger passthrough effect of about 70 percent.

Thus, most of the subsidy is translated directly into higher tuition. But do these subsidies achieve their goal of increasing college enrollment? Grey Gordon and Aaron Hedlund attempt to estimate the answer:
The tuition response completely crowds out any additional enrollment that the financial aid expansion would otherwise induce, resulting instead in an enrollment decline.

Of course, this was all famously predicted in 1987 by then Secretary of Education William J. Bennett:
Increases in financial aid in recent years have enabled colleges and universities blithely to raise their tuitions, confident that Federal loan subsidies would help cushion the increase.

Sunday, October 29, 2017

Houston Texans succeed by ignoring sunk costs

Although every econ student, and most MBA's, learn to ignore sunk costs, this learning seems not to have reached the NFL:
The propensity to stick with a quarterback too long isn’t just an anecdotal phenomenon favored by frustrated fans sick of losing with the same players. It has backing in research and hinges on the basic economic concept of sunk costs—the idea that money spent can’t be recovered. Typically, the more teams invest in a player, the more they’ll let him play.

Except for the Houston Texans, who have replaced their starter with Deshaun Watson, and now have one of the league's best offenses:
How the Texans reached this position—with an eagerness to look for a better option at quarterback at any given moment—sounds obvious. But it’s borderline radical in a league where coaches and executives attach themselves to their most prized investments with feverish devotion.

Some of the reluctance to ignore sunk costs is that management has to admit that they made an earlier mistake.